Starting and operating your own home based business is the ultimate tax shelter.

Although this article has been written from a Canadian income tax perspective, the principles should be practical in other tax jurisdictions.

1. Non-Deductible Personal Living Expenses

All of us have expenses that we incur in everyday living.

Either you rent an apartment or house or you own your residence. Utilities, insurance, rent, mortgage interest, property taxes, and maintenance and repairs are typical costs of operating your home.

Likely, you have a vehicle which also consumes large amounts of cash.

Add to this, dining out, entertainment, gifts, alcoholic beverages, office supplies, telephone and many other expenditures, and you have a significant cash outflow.

In most cases, as an employee, retired person, investor, student, or homemaker, few of these expenses are tax-deductible to you.

This means that you must earn a considerable income, pay your income taxes first, and then use what is left to pay all your expenses.

Some employees may be able to write-off some of their employment related expenses, if such are required by their contract of employment. However, even in this situation, the tax deductions are very limited.

2. Your Own Home Based Business Means Tax Deductions

Now consider the situation where you decide to start your own home based business.

Suddenly, many of your everyday expenses are now being used for business purposes and are now tax-deductible.

If you use one quarter of your home exclusively for business use, you will be able to deduct (or write-off) one quarter of all related occupancy costs. These expenses may include maintenance and repairs (that are not capital in nature), rent, mortgage interest, house or apartment insurance, power, heat, water, and property taxes.

As well, your vehicle expenses used for business purposes are another tax write-off. If you use your car ninety percent for business purposes, you can deduct ninety percent of your vehicle insurance, gas and oil, maintenance and repairs, car washes, license and registration, auto club, loan interest (within certain limits), and other costs from your income. You may also write-off one hundred percent of your business related parking. Capital Cost Allownance (C.C.A.) on your vehicle is also allowed for income tax purposes; depreciation is the accounting term for this tax deduction.

The Canadian government also allows as a deduction, fifty percent of your business related entertainment expenses.

Also tax-deductible are business related telephone expenses, Internet access, office supplies, travel, books, memberships, and a host of other expenditures.

3. Income Splitting with Your Home Based Business

If you have a high paying job, you will pay higher taxes because the rates of tax increase as your income does.

With your own business, you can pay reasonable wages to your spouse and children. In this way, you can legally divert income taxed at your higher rate to your family members that are in a lower tax bracket.

This tax saving technique is called income splitting. It is another good reason why your own home based business is the ultimate tax shelter.

4. Even a Part-Time Home Based Business Works

Even if you have a full-time job, running a part-time business can be advantageous.

Of course, you must actually run a real, moneymaking business. Any attempts to write unprofitable hobbies off will ultimately fail with the taxation authorities.

If you earned eight thousand dollars during the year from your part-time business and were able to deduct eight thousand dollars in car expenses, home office expenses, entertainment costs, office supplies, and other business related expenditures, you would have a net business income of nil. You would pay no tax on this additional income.

Don`t miss this important point! Although these tax deductions are actual, legitimate business expenses, these are expenditures you would probably have made anyway, whether you had a business or not.

Thus, by rearranging your affairs to start and operate a home based business, you have been able to convert non-deductible personal expenditures into legally deductible business expenses. You have successfully sheltered your income from tax and have split your income with family members in lower tax brackets.

Yes, indeed, your home based business has become your ultimate tax shelter.